Obamacare’s circuitous path

By Ben Walsh

July 22, 2014

U.S. federal courts don’t agree on whether the federal government is allowed to subsidize health insurance costs. The final decision, which seems likely to be made by the Supreme Court, will have massive political, economic and human impact. Not only does healthcare make up 18% of U.S. GDP, but the idea that the federal government can subsidize insurance is a key to the Affordable Care Act and the health insurance of more than 5 million Americans.

Here’s what happened today: first, the District of Columbia Circuit ruled in Halbig v. Burwell that the subsidies Obamacare has been providing for health insurance in 36 states were illegal. According to the decision, states alone, not the federal government, can provide subsidized health insurance. The court’s reasoning is based on imprecise wording in the lawand contains an even worse pizza metaphor. Only 16 states, including California, Massachusetts and New York, have set up markets without the federal government’s involvement. Then, Fourth Circuit, which covers a large portion of the Southeast U.S., came to the exact opposite conclusion in King v. Burwell, in part using a tangled pizza metaphor. Any changes in policy are on hold pending appeal of the D.C. Circuit’s decision by the government.

The affordability of Obamacare, for citizens and the government, is at stake here: premiums could rise by more than 76% if states do not create their own markets, depending on the size of the subsidy currently provided in each state. Generally, the poorer the state, the more premiums will rise. Not only would that mean some people who have already purchased health insurance could no longer afford it, it could make providing care to those who remain in the pool more expensive, as healthy people begin to drop their coverage. In healthcare wonk-speak, this is called a death spiral, and it is indeed as bad as it sounds: when only the sick have any incentive to buy insurance, only the sick are insured. That’s not a good business model.

Mike Konczal takes a look at the argument that Obamacare’s authors actually wantedfederally supported exchanges to be illegal precisely so that states would be coerced into setting up their own exchanges. The problem with that, Konczal says, is that no one let states know this was the intent. As Dr. Strangelove points out, “a doomsday machine only works if you tell others about it.” Based on its actions – the government is appealing the Halbig ruling – there is no evidence that the administration really wanted a doomsday machine. — Ben Walsh

CORRECTION: The pizza metaphor was made in a concurring decision from the Fourth Circuit supporting federally supported exchanges, not the D.C. Circuit decision striking them down.

On to today’s links:

Herbalife
Bill Ackman’s Herbalife presentation was… underwhelming - DealBook
It’s “a lousy business but it is a business in which people have integrated their lives and their families” - John Hempton
Herbalife’s pre-response to Ackman. “Spolier: [the company thinks] it is legitimate” -Dan McCrum